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Friday, September 20, 2013

Strategy: The other side of debt is savings (CIMB)

Strategy
The other side of debt is savings
NEUTRAL - Maintained
Author(s): Kenneth NG, CFA +65 6210 8610, Donald CHUA, Jessalynn CHEN
▊ There is a relationship between income levels, wealth and savings. When one earns more, one tends to have more savings, but also spends more and takes on more debt. In view of the recent concerns over Singapore’s household debt, we will zoom in on this topic here. We conclude that the average household is far from stretched. We keep our Neutral rating and 3,400 end-CY13 (bottom-up) FSSTI target only because low valuations are justified, as earnings are not rosy (-5% yoy) and ROEs are also contracting. CAPL, DBS, EZI, FR, KEP, M1, OEL, SUN, THBEV and UOL are still our top picks.

Consumption, debt and savings grow with income
Singapore's household debt-to-GDP (75%) has made new highs. The Monetary Authority of Singapore (MAS) has imposed borrowing limits on credit cards, car financing and mortgages. Though these make for worrying headlines, we dig through household wealth data to show that the average household is more than fine. Sure, debt is rising but that is going up with affluence and savings. CPF cash balances have posted 15% CAGR since 2008 and provide coverage of 1.2x for total mortgages. The proportion of household wealth held in property (49%) is lower than pre-Asian crisis days of ~60%, while the proportion of wealth in cash has steadily risen in the last two decades.

Affluence-adjusted debt ratio makes sense
Also, there is a correlation between affluence and debt (Key chart #2) across countries. Compared with nations with similar income levels, Singapore’s household debt levels look meek. As you earn more, you save more and take on bigger debts as you upgrade your lifestyle. The crucial factor is whether you are doing this well before you can afford it. The data show that the average Singapore household has not gone overboard on debt, with recent policies likely to target a minority.

No household debt problem
The other side of debt is assets. The average household has more than 3 times savings/GDP vs. debt/GDP, even if we exclude property assets. Household balance sheets look safe. Hence, we do not see a household debt problem in Singapore.

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